Nathalie Heidema, Chapter 2, Question #7

What I learned in this chapter is why incentives matter and how you can use them to channel people's behavior towards a desired outcome. It's like from the law of demand- the more expensive something gets, the less likely people are to buy it and vice versa. We know that everybody wants to make himself better off, so we behave in our own (rational) self interest. So people respond to incentives in various ways, sometimes it is predictable and sometimes not. Wheelan talked about the "prisoner's dilemma" - They both got 25 years sentence by confessing the crime instead of 5 if kept silent. But as they thought about their own best interest and thought that the other would rat him out and so get a life sentence, 25 years seemed a better deal for them. They both behaved rationally but made themselves worse off. Also the government can get the incentives wrong. An example was Mexico City, which with its car regulation tried to fight pollution. But what happened is that people bought new cars or kept their old ones to avoid the limitations. Economics is therefore important so we can get the incentives right and that helps the system work better. Incentives simply matter.